Investor psychology and repres

             Investor psychology and representativeness
             Men, it has been well said think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one. - Charles MacKay, 1841 in his classic Extraordinary Popular Delusions and the Madness of Crowds.
             History has been mired with several crisis and contagions. The list is endless right from tulip mania in Holland in 1634 -37, the Mississippi bubble in France in 1719, the South Sea bubble in England in 1720, and the Japanese property bubble of the 1980s. America, which boasts to an epitome of perfect market, has its own share of crashes, which include the ones in 1873 and the 1929 and 1987, and 2000 stock market crashes. Many investors react to market conditions like lemmings: stampeding up the high mountain when markets are rising and down into the cold deep sea when markets are falling.
             The phenomenon of global stock market contagion is now too familiar and too serious to ignore and has become an integral part of the stock market activity. The international spread of a financial crisis is also no new phenomenon. There is a famous saying that if the US markets sneeze, the rest of the markets across the globe catch cold. Many of the world markets blindly react to the actions of US markets without taking the fundamentals into consideration. Such actions of investors contradict the much touted efficient market hypothesis and the rational behavior of investors. More than anything else, psychological factors seem to be playing an increasingly important role at this juncture. Surveys conducted after market crashes globally have shown that investors react to big price drops more than any other news. Nearly 67% of the individual investors and 64% of the institutional investors have opined that it was investors' psychology, which has been driving the market declines.
             In fact, during the Internet boom in the late 1990s, the financial community foun...

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